Germany’s economy is now shrinking

THE MOOD music had grown so ominous that the shock was somewhat muted. After weeks of dismal survey and industrial-output numbers, it was little surprise to learn on August 14th that Germany’s GDP had contracted by 0.1% in the second quarter of 2019 compared with the previous three months. The economy has been essentially flat over the past year. Household spending, bolstered by wage growth in a tight labour market, has held up but the slump in manufacturing, which represents over one-fifth of output, is deepening. Companies are cutting work hours and issuing profit warnings. Many analysts think Germany is heading for outright recession.

This has triggered two debates. First, are Germany’s woes home-made or imported? A year-on-year 8% slump in exports appears to be the main driver of the slowdown. The uncertainty spawned by the US-China trade spat and the prospect of a no-deal Brexit are largely out of the hands of Angela Merkel’s government. Demand for German products in China is slowing. Germany will be badly hurt if Donald Trump follows through on his threat to whack tariffs on car imports later this year.

Yet this is only half the story. Analysts have long urged Germany to wean itself off its export-dependence. Despite a mild rebalancing, the current-account surplus still stands at a whopping 7.4...